3. Loans, Allowance for Loan Losses and Credit Quality

12 Months Ended

Dec. 31, 2015

Accounts, Notes, Loans and Financing Receivable, Gross, Allowance, and Net [Abstract]

Note 3. Loans, Allowance for Loan Losses and Credit Quality

The composition of net loans as of the balance sheet dates was as follows:

	2015			2014
Commercial & industrial	$	65,191,124		$	64,390,220
Commercial real estate		178,206,542			166,611,830
Residential real estate - 1st lien		162,760,273			163,966,124
Residential real estate - Jr lien		44,720,266			44,801,483
Consumer		7,241,224			8,035,298
		458,119,429			447,804,955
Deduct (add):
Allowance for loan losses		5,011,878			4,905,874
Deferred net loan costs		(316,491	)		(303,394	)
		4,695,387			4,602,480
Net Loans	$	453,424,042		$	443,202,475

The following is an age analysis of past due loans (including non-accrual), by portfolio segment:

													90 Days or
			90 Days		Total						Non-Accrual		More
December 31, 2015	30-89 Days		or More		Past Due		Current		Total Loans		Loans		and Accruing
Commercial & industrial	$	224,997	$	168,244	$	393,241	$	64,797,883	$	65,191,124	$	441,103	$	13,556
Commercial real estate		888,994		560,439		1,449,433		176,757,109		178,206,542		2,400,757		45,356
Residential real estate
- 1st lien		2,875,768		1,408,551		4,284,319		158,475,954		162,760,273		2,009,079		801,241
- Jr lien		521,373		63,031		584,404		44,135,862		44,720,266		386,132		63,031
Consumer		83,343		0		83,343		7,157,881		7,241,224		0		0
Total	$	4,594,475	$	2,200,265	$	6,794,740	$	451,324,689	$	458,119,429	$	5,237,071	$	923,184

													90 Days or
			90 Days		Total						Non-Accrual		More
December 31, 2014	30-89 Days		or More		Past Due		Current		Total Loans		Loans		and Accruing
Commercial & industrial	$	439,151	$	299,095	$	738,246	$	63,651,974	$	64,390,220	$	552,386	$	23,579
Commercial real estate		988,924		5,313		994,237		165,617,593		166,611,830		1,934,096		5,313
Residential real estate
- 1st lien		4,446,138		1,484,334		5,930,472		158,035,652		163,966,124		1,263,046		980,138
- Jr lien		637,917		179,920		817,837		43,983,646		44,801,483		404,061		115,852
Consumer		56,392		0		56,392		7,978,906		8,035,298		0		0
Total	$	6,568,522	$	1,968,662	$	8,537,184	$	439,267,771	$	447,804,955	$	4,153,589	$	1,124,882

For all loan segments, loans over 30 days are considered delinquent.

As of December 31, 2015, there were five residential mortgage loans in process of foreclosure totaling $400,905.

The following summarizes changes in the allowance for loan losses and select loan information, by portfolio segment:

As of or for the year ended December 31, 2015
							Residential			Residential
	Commercial			Commercial			Real Estate			Real Estate
	& Industrial			Real Estate			1st Lien			Jr Lien			Consumer			Unallocated		Total
Allowance for loan losses
Beginning balance	$	646,719		$	2,311,936		$	1,270,766		$	321,099		$	118,819		$	236,535	$	4,905,874
Charge-offs		(200,900	)		(14,783	)		(150,947	)		(66,104	)		(69,632	)		0		(502,366	)
Recoveries		59,264			0			6,042			240			32,824			0		98,370
Provision (credit)		207,819			(144,475	)		242,167			167,587			(6,322	)		43,224		510,000
Ending balance	$	712,902		$	2,152,678		$	1,368,028		$	422,822		$	75,689		$	279,759	$	5,011,878
Allowance for loan losses
Evaluated for impairment
Individually	$	0		$	0		$	25,100		$	114,600		$	0		$	0	$	139,700
Collectively		712,902			2,152,678			1,342,928			308,222			75,689			279,759		4,872,178
Total	$	712,902		$	2,152,678		$	1,368,028		$	422,822		$	75,689		$	279,759	$	5,011,878
Loans evaluated for impairment
Individually	$	286,436		$	2,551,748		$	1,419,808		$	234,004		$	0				$	4,491,996
Collectively		64,904,688			175,654,794			161,340,465			44,486,262			7,241,224					453,627,433
Total	$	65,191,124		$	178,206,542		$	162,760,273		$	44,720,266		$	7,241,224				$	458,119,429

As of or for the year ended December 31, 2014
							Residential			Residential
	Commercial			Commercial			Real Estate			Real Estate
	& Industrial			Real Estate			1st Lien			Jr Lien			Consumer			Unallocated			Total
Allowance for loan losses
Beginning balance	$	516,382		$	2,143,398		$	1,452,184		$	366,471		$	105,279		$	271,201		$	4,854,915
Charge-offs		(153,329	)		(167,841	)		(58,904	)		(51,389	)		(112,376	)		0			(543,839	)
Recoveries		6,249			0			14,543			240			33,766			0			54,798
Provision (credit)		277,417			336,379			(137,057	)		5,777			92,150			(34,666	)		540,000
Ending balance	$	646,719		$	2,311,936		$	1,270,766		$	321,099		$	118,819		$	236,535		$	4,905,874
Allowance for loan losses
Evaluated for impairment
Individually	$	0		$	34,400		$	43,400		$	0		$	0		$	0		$	77,800
Collectively		646,719			2,277,536			1,227,366			321,099			118,819			236,535			4,828,074
Total	$	646,719		$	2,311,936		$	1,270,766		$	321,099		$	118,819		$	236,535		$	4,905,874
Loans evaluated for impairment
Individually	$	390,605		$	1,930,993		$	721,241		$	328,889		$	0					$	3,371,728
Collectively		63,999,615			164,680,837			163,244,883			44,472,594			8,035,298						444,433,227
Total	$	64,390,220		$	166,611,830		$	163,966,124		$	44,801,483		$	8,035,298					$	447,804,955

Impaired loans by portfolio segment were as follows:

	As of December 31, 2015						2015
			Unpaid				Average
	Recorded		Principal		Related		Recorded
	Investment		Balance		Allowance		Investment
With an allowance recorded
Commercial & industrial	$	0	$	0	$	0	$	37,359
Commercial real estate		0		0		0		40,902
Residential real estate - 1st lien		173,788		182,251		25,100		228,273
Residential real estate - Jr lien		234,004		284,227		114,600		155,207
		407,792		466,478		139,700		461,741
With no related allowance recorded
Commercial & industrial		286,436		366,387				446,817
Commercial real estate		2,551,748		2,776,729				2,151,713
Residential real estate - 1st lien		1,246,020		1,460,402				973,572
Residential real estate - Jr lien		0		0				113,964
		4,084,204		4,603,518				3,686,066
Total	$	4,491,996	$	5,069,996	$	139,700	$	4,147,807

	As of December 31, 2014						2014
			Unpaid				Average
	Recorded		Principal		Related		Recorded
	Investment		Balance		Allowance		Investment
With an allowance recorded
Commercial & industrial	$	0	$	0	$	0	$	158,690
Commercial real estate		204,511		220,981		34,400		280,104
Residential real estate - 1st lien		115,108		144,708		43,400		294,807
Residential real estate - Jr lien		0		0		0		149,772
		319,619		365,689		77,800		883,373
With no related allowance recorded
Commercial & industrial		390,605		424,598				507,232
Commercial real estate		1,726,482		1,689,772				1,294,710
Residential real estate - 1st lien		606,133		875,841				971,542
Residential real estate - Jr lien		328,889		390,260				238,826
		3,052,109		3,380,471				3,012,310
Total	$	3,371,728	$	3,746,160	$	77,800	$	3,895,683

Interest income recognized on impaired loans is immaterial for all periods presented.

For all loan segments, the accrual of interest is discontinued when a loan is specifically determined to be impaired or when the loan is delinquent 90 days and management believes, after considering collection efforts and other factors, that the borrower's financial condition is such that collection of interest is considered by management to be doubtful.  Any unpaid interest previously accrued on those loans is reversed from income.  Interest income is generally not recognized on specific impaired loans unless the likelihood of further loss is considered by management to be remote.  Interest payments received on impaired loans are generally applied as a reduction of the loan principal balance.  Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are considered by management to be reasonably assured.

Credit Quality Grouping

In developing the allowance for loan losses, management uses credit quality grouping to help evaluate trends in credit quality. The Company groups credit risk into Groups A, B and C. The manner the Company utilizes to assign risk grouping is driven by loan purpose. Commercial purpose loans are individually risk graded while the retail portion of the portfolio is generally grouped by delinquency pool.

Group A loans - Acceptable Risk – are loans that are expected to perform as agreed under their respective terms.  Such loans carry a normal level of risk that does not require management attention beyond that warranted by the loan or loan relationship characteristics, such as loan size or relationship size. Group A loans include commercial purpose loans that are individually risk rated and retail loans that are rated by pool. Group A retail loans include both performing consumer and residential real estate loans. Residential real estate loans are loans to individuals secured by 1-4 family homes, including first mortgages, home equity and home improvement loans. Loan balances fully secured by deposit accounts or that are fully guaranteed by the Federal Government are considered acceptable risk.

Group B loans – Management Involved - are loans that require greater attention than the acceptable loans in Group A. Characteristics of such loans may include, but are not limited to, borrowers that are experiencing negative operating trends such as reduced sales or margins, borrowers that have exposure to adverse market conditions such as increased competition or regulatory burden, or borrowers that have had unexpected or adverse changes in management. These loans have a greater likelihood of migrating to an unacceptable risk level if these characteristics are left unchecked. Group B is limited to commercial purpose loans that are individually risk rated.

Group C loans – Unacceptable Risk – are loans that have distinct shortcomings that require a greater degree of management attention.  Examples of these shortcomings include a borrower's inadequate capacity to service debt, poor operating performance, or insolvency.  These loans are more likely to result in repayment through collateral liquidation. Group C loans range from those that are likely to sustain some loss if the shortcomings are not corrected, to those for which loss is imminent and non-accrual treatment is warranted. Group C loans include individually rated commercial purpose loans, and retail loans adversely rated in accordance with the Federal Financial Institutions Examination Council’s Uniform Retail Credit Classification Policy. Group C retail loans include 1-4 family residential real estate loans and home equity loans past due 90 days or more with loan-to-value ratios greater than 60%, home equity loans 90 days or more past due where the bank does not hold first mortgage, irrespective of loan-to-value, loans in bankruptcy where repayment is likely but not yet established, and lastly consumer loans that are 90 days or more past due.

Commercial purpose loan ratings are assigned by the commercial account officer; for larger and more complex commercial loans, the credit rating is a collaborative assignment by the lender and the credit analyst. The credit risk rating is based on the borrower's expected performance, i.e., the likelihood that the borrower will be able to service its obligations in accordance with the loan terms. Credit risk ratings are meant to measure risk versus simply record history.  Assessment of expected future payment performance requires consideration of numerous factors.  While past performance is part of the overall evaluation, expected performance is based on an analysis of the borrower's financial strength, and historical and projected factors such as size and financing alternatives, capacity and cash flow, balance sheet and income statement trends, the quality and timeliness of financial reporting, and the quality of the borrower’s management.  Other factors influencing the credit risk rating to a lesser degree include collateral coverage and control, guarantor strength and commitment, documentation, structure and covenants and industry conditions.  There are uncertainties inherent in this process.

Credit risk ratings are dynamic and require updating whenever relevant information is received.  The risk ratings of larger or more complex loans, and Group B and C rated loans, are assessed at the time of their respective annual reviews, during quarterly updates, in action plans or at any other time that relevant information warrants update. Lenders are required to make immediate disclosure to the Chief Credit Officer of any known increase in loan risk, even if considered temporary in nature.

The risk ratings within the loan portfolio by segments as of the balance sheet dates were as follows:

As of December 31, 2015
					Residential		Residential
	Commercial		Commercial		Real Estate		Real Estate
	& Industrial		Real Estate		1st Lien		Jr Lien		Consumer		Total
Group A	$	59,764,081	$	168,326,527	$	158,834,849	$	44,041,594	$	7,241,224	$	438,208,275
Group B		4,724,729		4,529,493		599,516		212,508		0		10,066,246
Group C		702,314		5,350,522		3,325,908		466,164		0		9,844,908
Total	$	65,191,124	$	178,206,542	$	162,760,273	$	44,720,266	$	7,241,224	$	458,119,429

As of December 31, 2014
					Residential		Residential
	Commercial		Commercial		Real Estate		Real Estate
	& Industrial		Real Estate		1st Lien		Jr Lien		Consumer		Total
Group A	$	61,201,586	$	157,767,641	$	160,912,689	$	44,018,956	$	8,035,298	$	431,936,170
Group B		2,316,908		3,280,904		228,148		251,822		0		6,077,782
Group C		871,726		5,563,285		2,825,287		530,705		0		9,791,003
Total	$	64,390,220	$	166,611,830	$	163,966,124	$	44,801,483	$	8,035,298	$	447,804,955

Modifications of Loans and TDRs

A loan is classified as a TDR if, for economic or legal reasons related to a borrower’s financial difficulties, the Company grants a concession to the borrower that it would not otherwise consider.

The Company is deemed to have granted such a concession if it has modified a troubled loan in any of the following ways:

●   Reduced accrued interest

●   Reduced the original contractual interest rate to a rate that is below the current market rate for the borrower;

●   Converted a variable-rate loan to a fixed-rate loan;

●   Extended the term of the loan beyond an insignificant delay;

●   Deferred or forgiven principal in an amount greater than three months of payments; or,

●   Performed a refinancing and deferred or forgiven principal on the original loan.

An insignificant delay or insignificant shortfall in the amount of payments typically would not require the loan to be accounted for as a TDR.  However, pursuant to regulatory guidance, any payment delay longer than three months is generally not considered insignificant. Management’s assessment of whether a concession has been granted also takes into account payments expected to be received from third parties, including third-party guarantors, provided that the third party has the ability to perform on the guarantee.

The Company’s TDRs are principally a result of extending loan repayment terms to relieve cash flow difficulties. The Company has only, on a limited basis, reduced interest rates for borrowers below the current market rate for the borrower.  The Company has not forgiven principal or reduced accrued interest within the terms of original restructurings, nor has it converted variable rate terms to fixed rate terms.  However, the Company evaluates each TDR situation on its own merits and does not foreclose the granting of any particular type of concession.

TDRs by segment for the periods presented were as follows:

	Year ended December 31, 2015
			Pre-		Post-
			Modification		Modification
			Outstanding		Outstanding
	Number of		Recorded		Recorded
	Contracts		Investment		Investment
Commercial & industrial		2	$	199,134	$	204,142
Commercial real estate		3		581,431		616,438
Residential real estate - 1st lien		12		1,229,100		1,303,228
Residential real estate - Jr lien		2		117,746		121,672
Total		19	$	2,127,411	$	2,245,480

	Year ended December 31, 2014
			Pre-		Post-
			Modification		Modification
			Outstanding		Outstanding
	Number of		Recorded		Recorded
	Contracts		Investment		Investment
Commercial real estate		1	$	301,823	$	301,823
Residential real estate - 1st lien		11		1,294,709		1,332,336
Total		12	$	1,596,532	$	1,634,159

The TDRs for which there was a payment default during the twelve month periods presented were as follows:

Year ended December 31, 2015

	Number of		Recorded
	Contracts		Investment
Commercial real estate		1	$	149,514
Residential real estate - 1st lien		4		286,803
Residential real estate - Jr lien		1		69,828
Total		6	$	506,145

Year ended December 31, 2014

	Number of		Recorded
	Contracts		Investment
Residential real estate - 1st lien		2	$	137,830

TDRs are treated as other impaired loans and carry individual specific reserves with respect to the calculation of the allowance for loan losses.  These loans are categorized as non-performing, may be past due, and are generally adversely risk rated. The TDRs that have defaulted under their restructured terms are generally in collection status and their reserve is typically calculated using the fair value of collateral method. At December 31, 2015, the specific allowance related to TDRs was approximately $25,100.  There was no specific allowance related to TDRs at December 31, 2014.

As of December 31, 2015, the Company was contractually committed to lend up to $450,000 in additional funds to one debtor with an impaired SBA 75% guaranteed cap line of credit,  This debtor’s loan relationship is expected to strengthen as a result of a prior troubled debt restructuring.  With this exception, as of the balance sheet dates, the Company was not contractually committed to lend additional funds to debtors with impaired, non-accrual or modified loans.